Banking & Finance: The Technology Imperative



The BFSI segment continued to be the hotbed of technology spending in the domestic market, with public sector banks topping the league. In an era of liberalization and financial reforms, banks and financial services are getting more and more competitive. 

Moving to the center
To start with, the change can be seen at the IT architecture level itself, with many banks going for centralized core-banking solutions. Last year, SBI has invested Rs 500 crore in the IT architecture project and an additional Rs 200 crore for a trade finance project. 

AG Prabhu, banking technology consultant says, “In the earlier model, linkages with e-banking channels for funds transfer and bill payments and settlements were poor. With the overall risk profile of the bank going up, the entire bank was affected and the situation had to be remedied”. 

The three major parts of a bank’s technology imperative are: transaction processing, information systems, and strategic technology. The top most priority for the PSU banks is to put the transaction processing in place. The principles on which this architecture is built are: 

  • Processing high volume of data with scalability and continuous availability.
  • Separation of application services from data management and user interfaces through layered multi-tiered information access to data warehouse. 
  • Inter-operation of application components through message-based architecture.
  • Platform-independence of application services 
  • Flexibility for migrations. 

Managing risk 
Operational risk management is entirely dependent on statistical probability distribution models, and therefore a complete risk management strategy requires a centralized data warehouse with requisite reporting and analytic tools. 

Due to varying size of balance sheets, banks have been advised to design risk management architecture, dictated by the size, complexity of business, risk philosophy, market perception and level of capital. 

The New Basel Capital Accord or Basel II seeks to contribute to the safety of the financial system of a country by implementing minimum capital requirements on credit, operational and market risk; executing new supervisory review processes; and improving market disclosure. Complying with the Basel II requirements is important for any Indian financial institution to participate in the global financial services industry. 

Says HS Rajshekhar of i-Flex Consulting, “Recently, significant advances have been made in credit risk modeling at the portfolio level. Policy makers and practitioners are also seriously working on applying these models.”

Real Time Gross Settlement (RTGS) when operational would provide a high value payments systems that would enable the core of the banking system across the country to make secure inter-bank payments. It is expected to enable about 205 Indian banks and financial institutions to interface directly. By underwriting all payments with collateral held at the Reserve Bank of India, the RTGS system will reduce ‘systemic risk’ thereby providing increased integrity and security for all inter-bank transactions. Improvements are also being brought about in the payment system through Centralised Funds Management System (CFMS), which enables funds managers of banks to obtain a national position of balances in their accounts with the Reserve Bank. 

Integrating multiple channels 
ATMs, phone banking and even Internet banking almost seems like a passe’, customers are now demanding multiple channels and consistent 24×7 service across these channels irrespective of their location, thus making banking services more accessible. 

Responding to the customer needs, banks are developing more intensive knowledge about retail customers and corporate clients so that they can execute relationship management strategies. 

C²RM (Corporate Client Relationship Management) is a CRM term that is now gaining weight in banking services. C²RM is designed for a more complex product set used by fewer clients who are corporate entities. Execution of CRM and C²RM relies on data and technology to create knowledge about the customer or the client.

Banks combine internal data with data obtained from external sources in order to create a repository, a data warehouse. This is further analyzed to create customer or client profiles to identify opportunities. This analysis results in customer intelligence that can be used to decide on actionable points to maximize business opportunity and minimize risk. 

Effective customer relationship management usage in financial services helps improve customer acquisition and increase cross-selling. But this has to be applied consistently across the entire enterprise. That is, for the project to succeed- there has to be one-view of the bank and a data warehouse in place. 

CRM has evolved from being a technology-driven sophisticated tool for marketing to being a key component of business strategy in the financials services industry. 

Cross-selling possibilities are often cited as one of the CRM pay-offs. But CRM could work cross-purposes too. Imagine the credit card division of a large financial institution conducting a targeted marketing campaign to increase credit limits and getting a good response. After an exhaustive credit analysis of customer information, some other division runs a campaign persuading many of these customers to consolidate debt and reduce credit exposure and risk. The net result would be a loss for the institution and a confused customer.

This typically happens when customer data is not shared seamlessly across the organization in real-time. Many times customer information gathered at one channel is inaccessible at other channels. An ATM behavior of a customer is not co-related with his online behavior. Eventually, this calls for integration across all marketing, sales, and service channels and across all
usinesses. Look at these as various stops in a CRM continuum. 

The STP factor

WHERE DID THE IT SPEND GO? 
Infrastructure: Servers, desktops, storage
Networking 
Core-banking applications
Other banking applications 
Other tech for statutory compliance
Disaster-recovery & readiness
ATM deployment
Risk management
STP framework
Trade finance applications
CRM
Business intelligence
IT consultancy & services

The Indian securities industry is increasingly getting integrated with the global security industry. One of the primary building blocks for managing risk is straight-through-processing (STP). Studies have shown that the percentage of global trade failures resulting from unmatched trade data is of the order of around 15% of the total trades, which in monetary terms is upwards of billions of dollars. The STP technology framework seeks to provide these efficiencies by providing a seamless data flow both within the enterprise as well as across the market, without any manual intervention. According to Sajit Dayanandan, Financial Technologies India, “The concept of STP is expanding into defining a full STP framework including internal and external automation, considering other interested parties apart from the basic settlement group of brokers, investment managers and custodians”. 

Shared ATM Networks 
Some banks find it difficult to share their ATM network with competitors, as ATMs are being projected as the key differentiator while others are aggregating to achieve scale. 

Shared ATM networks are a global phenomenon. While ATMs are high on fixed costs, the variable costs are lesser, and as usage is high in shared networks, it increases profitability by maximising utilization. These networks evolve from being a proprietary one set up by individual banks. The ones that set up ATM infrastructure are called the acquiring banks- like UTI Bank in the Cashnet case. UTI has around 800 ATMs in its network. Standard Chartered and Citibank with its credit cards and debit cards base are called the issuing banks. These banks spur the growth in the network usage. The transaction fee paid by the users is shared among the issuing bank to the acquiring bank. Explains Dr P J Nayak, chairman, UTI Bank, “For shared ATM networks, we need to differentiate between issuing banks and the acquiring banks.”. 

SBI and its affiliate banks are slated to install about 1,500 NCR ATMs over the next 18 months. With this deployment, SBI will have the country’s largest ATM network, with more than 3,000 machines. The contract includes hardware, site installation services and ATM network management services. 

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